Home flipping by and for the favored few

Investors buy a home in Venice for $900,000. Nearly $600,000 is spent on renovations. The finished product gets sold for $2.065 million. That's a much higher profit than what standard mom and pop flippers would be looking for - and no wonder, considering that this property was the work of high-end flippers specializing in $1-million-plus real estate. Going after luxury properties has gotten so lucrative that powerhouse investors, including Colony Capital and the Pritzker/Vlock Family Office, are helping bankroll Nick Sinatra's American Coastal Properties, which is based in Irvine. From the WSJ:

Initially after the housing crash in 2009, investors focused on fishing out foreclosed and other distressed properties on the cheap, with an eye toward renting out those homes or flipping them for a quick profit. But that trade has come under pressure as foreclosures have fallen and as competition has picked up. Now some companies are focusing on flipping expensive properties amid a housing-market rebound that has been driven, in part, by limited listings of homes for sale, particularly in California.

Unlike the "flippers" of the housing bubble, who bought homes with little or no money down, those investors today often have to make all-cash purchases, which has reduced the pool of potential buyers. ACP focuses on buying homes with "lot value"--that is, properties that currently have little curb appeal but that are located in exclusive neighborhoods such as Los Angeles's Venice Beach or La Jolla, Calif. They spend between 50% to 100% of the purchase price--hundreds of thousands of dollars--to gut, redesign and rebuild the home.

High-end home sales, which had been lagging in the early days of the housing recovery, are making up for lost time, with sales of Southern California properties over $800,000 up 48 percent in August compared with a year earlier, according to Dataquick. Flipping at this level remains unusual - and risky - though ACP is obviously making a business of it. So is Bruce Bartlett, managing partner at Sequoia Real Estate Partners, a private-equity firm in Los Angeles. From the Journal:

Mr. Bartlett's company has raised a $4.5 million fund that allows him to work on about seven homes at a time. Most of his investment money is "very old school--doctors, lawyers, family trusts," and he says he has outperformed his promised 12% returns. His firm has just finished renovating a Rancho Palos Verdes, Calif., home that he hopes to sell for about $1.43 million. He paid $850,000 for it earlier this year after the longtime owner died and his wife moved. Mr. Bartlett heard about the home from a friend and convinced the owner's children to sell.

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